Municipal-owned entities in SA are overseen by an extensive array of governance legislation, regulations and codes, yet are often engulfed in corruption, mismanagement and inefficiencies.
So dysfunctional are many of the cities’ municipal-owned entities that late last year, Johannesburg’s new DA mayor, Herman Mashaba, threatened to close the lot of them in exasperation and incorporate their staff into the public service.
The irony is that the rationale for a municipal-owned entity is for it to be an alternative way of delivering public services that is supposedly more efficient and more profitable than traditional public services.
Municipal-owned entities are essentially ring-fenced businesses that have a mandate to deliver a public service, can operate independently from the municipality and ideally, would have less bureaucratic constraints in order to improve performance using private sector delivery models.
In the General Report on Audit Outcomes for Local Government for the years 2009 to 2015 the auditor-general lists noncompliance with laws and regulations, lack of internal controls, supply chain management transgressions, unauthorised, irregular, fruitless and wasteful expenditure and corruption as some of the key failures of municipal-owned entities.
Countrywide, there are a number of exceptionally well-run municipal entities, such as the Durban Marine Theme Park and the Johannesburg Social Housing Company. However, they are among the rare exceptions.
What are the reasons for the failure of many of SA’s municipal-owned entities and what can be done to turn them around?
In broad terms, SA has a plethora of effective laws, governance codes and regulations to guide municipal entities. Even if there are weaknesses, genuinely implementing the governance regime, without any changes, would improve the governance of municipal entities. Therefore, as a start, municipalities must enforce laws, governance codes and regulations governing municipal entities.
Some municipal-owned entities are established without a clear rationale. Many are not financially viable. They depend heavily on grant funding and have been consistently unable to generate their own revenue.
The government needs to do regular reviews to measure the operational effectiveness of municipal entities, their development effect and whether they still need to exist in their current form. This can be done every five years.
If municipal-owned entities are not financially sustainable or relevant, they should be merged with others or closed down.
Municipalities need to provide better strategic guidance to municipal-owned entities, without political interference or micromanaging. Municipal-owned entities are supposed to have service delivery agreements with parent municipalities that set out their delivery obligations. However, in many cases, municipalities do not hold entities accountable to meet these goals.
Municipal-owned entity executives often get huge annual performance bonuses even though they are loss-making, have to be bailed out and do not meet their service delivery targets. This should stop.
Lack of capacity is widespread. In the best of times, it is difficult to secure competent staff with the "right mix of public and private sector experience and know-how". In many municipal entities, the staff complement suffers from a dearth of minimum competencies, especially in financial management.
Political appointees without the appropriate skills exacerbate capacity constraints. Cadre deployment to municipal entities should be abolished. Merit-based appointments are crucial to improve the performance of municipal entities.
The danger of stand-alone entities is that democratic control over them is often the first to fall by the wayside. Municipal entities must become more transparent and make their operational and financial information more widely accessible. They must make their annual reports publicly available.
Opposition parties, civil society, community groups, consumers and the media must hold municipal entities more accountable. As a case in point, when Johannesburg City Power was established as a ring-fenced municipal-owned entity, there was a requirement that the entity establish a user forum including customers, civil watchdogs and community groups that could hold it additionally accountable.
Furthermore, it was required that City Power also establish a customer charter in partnership with users and stakeholders, setting out the rights of customers.
Establishing user forums and customer charters involving users, civil society and stakeholders may help to monitor entities and hold them accountable.
In many cases, the poor governance of most municipal-owned entities mirrors that of their parent municipalities. To illustrate the point, in the 2012-13 financial year, no municipal entity in the Eastern Cape, Free State, Limpopo and North West provinces received a clean audit. Not surprisingly, no Eastern Cape, Free State, North West or Limpopo municipal-owned entity in that financial year received clean audits either.
Unless the governance of parent municipalities is improved, it is going to be very difficult to raise the performance of municipal-owned entities.
Conversely, municipal-owned entities in parent municipalities that receive clean audits are more likely to be better managed and get clean audits. For example, KwaZulu-Natal municipalities that consistently score clean audits, such as Dannhauser, uMgungundlovu District, Richmond, eMnambithi/Ladysmith, and Uthungulu District, also have better managed municipal-owned entities.
Better-managed municipal-owned entities in these relatively better-run municipalities include the Uthungulu Financing Partnership, Uthungulu House Development Trust, Ilembe Management Development Enterprise and Ugu South Coast Tourism. Unless the governance of parent municipalities is improved, it is going to be very difficult to raise the performance of municipal-owned entities.
Finally, the political will to implement the governance regime for municipal entities is desperately lacking. The auditor-general regularly bemoans the lack of "consequences where there has been poor performance or transgressions" and decries the "low level of action against wrongdoers". He has also called for political leaders and officials who ignore their duties and contravene legislation to be dealt with decisively.
Former auditor-general Terence Nombembe has said that municipal-owned entities that have been consistently well managed have done so because of "decisive action" by leaders and officials.
• Gumede is associate professor at Wits University’s School of Governance and directs the programme on the study of SOEs. He was lead adviser to the Presidential Review Committee on State-Owned Enterprises (SOEs).
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